A bill intended to create private “retail franchise stores” to sell unlimited wine and spirits throughout the state has been introduced in the Senate. It is SB 548.
The intent is to supplement the 600 stores now operated by the LCB with 2,000 franchisees. The bill defines a “Retail franchise store” as “a business that has a retail franchise store contract with the board to sell liquor and wine to the public solely for off-premises consumption”. The definition of the “Retail franchise store” includes all (current) wine expanded permit holders licensed under section 415 and any business with significant retail experience the board chooses under selection criteria and standards set by the board.
The proposal allows any applicant with “significant retail experience” to apply, and it specifically provides that “notwithstanding any other provision of law, nothing in this act shall prohibit a franchisee from holding” a D, ID or R license.
There are 600 state store locations. In addition, there are 949 current holders of a wine expanded permit, all of whom meet the definition of a Retail Franchise Store.
The proposal requires the LCB to establish 2,000 franchise stores at the rate of 400 per year. An application must be filed with the Board and one criterion is whether “the applicant proposes an acceptable retail outlet and location for the sale of liquor and wine.” The board, in deciding if “the applicant proposes an acceptable retail outlet and location”, “shall conduct an investigation to determine the feasibility of the location and type of retail outlet that the applicant is currently operating.” Importantly, the new law would provide, “The board shall consider … the proximity of the proposed location to an existing Pennsylvania Liquor Store or proposed or existing franchise.”
A large problem for distributors falls here since current expanded wine permit holders are exempt from this section while D licensees are not. In other words, based on language specifically inserted into the bill by the sponsor, if a distributor applies for a location near a grocery store with an expanded wine permit, the distributor will probably be denied due to its proximity to the expanded wine permit licensee.
This is due to two key factors drafted into the bill: the expanded wine permit license holder is specifically defined as a “retail franchise store” and, in particular, expanded wine permit holders are exempt from provisions dealing with the quality of store and its location.
This proposal would move the state from having 600 retail outlets to 2,600 retail outlets. The Bill is drafted so there is no way to deny an existing grocery store, who is already on the playing field with an expanded wine permit, the status of becoming a franchisee due to their exemptions from the majority of the requirements that must be met by other applicants, particularly distributors. An R simply needs to obtain an expanded wine permit to achieve the enhanced applicant status.
Thus, a total of 949 existing expanded wine permits would, upon application, be granted the retail franchise store license. This would only leave a remaining 1,051 licenses for all other applicants with interested R licensees starting the application process with an expanded wine permits.
Meanwhile, the state will establish prices. Markups are controlled by the law, 10% for an item costing less than $24.99, and 14% for items that are sold above that price. These margins are insufficient to maintain a business that is basically limited to selling alcoholic beverages.
A more detailed analysis by the MBDA solicitor is below.
1. SB 548: a $750 fee converts existing Wine Expanded permit holders (of which there are 949 currently) into a “retail franchise store” plus allows the Board to open another 1051 franchisees (for a total of 2,000 franchised locations) from 1/1/ 2020, to 12/ 31/ 2024. Retail Franchise Stores to have agreement with Board for maximum of 3 years, after which Board has discretion whether to renew if store meets standards to be set by the Board.
a. Creates immediate impact of allowing any grocery or convenience store with an “R” and existing Wine Expanded permit ($2,000) to sell unlimited wine and spirits next year.
b. For the additional 1052 proposed slots, applications are open to “any business with significant retail experience” who meet selection criteria and standards to be set by the Board, and it shall not prohibit a D, ID, R or E from applying. Thus, non-licensed retail businesses can even apply.
c. The system would be highly regulated. This includes (1) “fixed” wholesale liquor prices to franchisees, (2) “fixed” statewide retail liquor prices, (3) determine the location of additional franchises (e.g., not permitted within 300 feet of schools, churches, etc. without approval from the Board and local municipality), (4) 9am-11pm hours of operation, and (5) implementation of growth incentives, which are additional discounts.
d. Standards set by the Board shall include, but not be limited to: (1) Minimum required number of SKUs available for sale at all times, (2) Appealing and clean retail store environment, (3) Maximized store locations throughout the state, (4) minimum amount of linear shelving, (5) updated computer systems, and (6) updated system for recording sales and tax collection.
e. Locations: The Board shall, in its application process, conduct an investigation to determine the feasibility of the proposed location and type of retail outlet currently operated by the applicant.
f. In determining “feasibility” the board shall consider the “proximity of the proposed location to an existing Pennsylvania Liquor Store or proposed or existing franchise”.
2. Application fee: $750 to holder of an expanded wine permit (who paid $2,000); others pay $750 to apply, $3,000 plus 2% of annual purchases of liquor and wine purchased from the State.
3. Wholesale is from state store system at these prices,
a. Liquor and wine products at a retail price of $24.99 or less, the discount rate shall be 10% of the list price.
b. Liquor and wine products at a retail price of $25 or more, the discount rate shall be 14% of the list price.
c. An additional discounting system will be set up to promote growth and expansion by rewarding annual growth of sales.